Company, Sole Trader or Partnership - a Guide

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1 Company, Sole Trader or Partnership - a Guide A LARGE INFLUENCE IN YOUR DECISION WILL BE YOUR PERSONAL CIRCUMSTANCES If you have no one else who will be taking part in the business with you, then being a sole trader or setting up as a company could be for you. But if you are intending to be in business with someone, you have the option of forming a partnership or a company. What is the difference between sole trader, a partnership and a company? 1. IF YOU OPERATE AS A SOLE TRADER -» The business will operate under your name,» The business GST number will be the same as your personal IRD number» The net profit of the business will be credited to you,» You will be responsible for the business debts. 2. IF YOU OPERATE AS A PARTNERSHIP -» The business will trade under the partners' names» The GST number will be the same as the partnership's IRD number» The net profit will be split among the partners» The partners will normally be jointly and severally liable for the debts of the partnership. 3. IF YOU OPERATE UNDER A COMPANY STRUCTURE -» The business will operate under the company's name (which will have "Limited" at the end of the name)» The company's GST number will be the same as the company's IRD number» The net profit of the business is the company's profit and it will pay tax on it, unless it is distributed as» directors' fees/shareholder salaries, in which case the directors/shareholders will pay tax on it» The company is liable for its debts, although office holders and shareholders can be held liable in certain» circumstances.

2 BELOW IS A CHECKLIST of things to do before you start your business -» Set up a business bank account» Register for GST (if applicable) -compulsory if turnover will be more than $60,000» Register as an employer (if applicable)» See an accountant for advise on getting started with record keeping» See your solicitor (if necessary to sign leases, etc). Options when setting up a business- To determine the most suitable structure you will need to consider a number of factors such as:» Which structure is right for the type of business you intend to run (eg. some professions can only be sole» traders or partnerships)» Owner's liability» Whether the business is new or already established - and a one-off project or on-going» Internal structure - eg. the number of people involved, the proportion of contributions» Continuity - eg. when the business is intended to be passed onto children» Set up and ongoing costs» Tax implications» How the structure will affect the growth of the business and its ability to access finance, etc Deciding on a business name If you are not trading under your own name, you need to decide on a trade name for your business. To check what names are already being used check the following:» Companies Register ( - for businesses registered as limited liability companies» Trade Marks Register at the intellectual Properties Office (ww.wiponz.govt.nz) - to make sure that the» name you have choose does not breach anyone's trademark» Telecom Yellow Pages ( - for any existing sole traders or partnerships using a» trading name» Domainz ( - to check that the internet Domain Name is still available to use for your» business

3 Protecting a business name Although there is no provision in New Zealand to register a 'business name' you may wish to consider registering a:» Company - this will ensure no other companies will be registered with an identical company name.» Trademark - this grants the owner exclusive use of that trademark for a specified range of goods or services. The above notes have been compiled to assist you, however, actions taken as a result of this document are at the discretion of the reader. Sole trader This is a single person business. If another person is involved then a partnership or company structure should be considered. The sole trader has individual ownership of the business. Advantages Easiest to set up Low start up costs and cheap to run Owner has complete control Simple tax - business income is part of owners income - may need to register for GST Easy structure to change once established You receive all the profits personally Disadvantages Not recognised as a separate legal entity Ceases on death of the owner Difficulty in accessing capital and credit Potential for higher tax bills if you earn over $7Ok than if set up as a company Unlimited liability - personally liable for all losses and debts Limited size and life How to set up as a sole trader 1. Inform Inland Revenue - and check if you need to register for GST. Ask about their Business Tax Information Officers and the free services they offer. 2. Check with your local council that your chosen place of work complies with health and safety regulations, the Resource Management Act, etc. 3. Certain businesses require a permit before they can start trading (eg. cafe, second-hand dealer, butcher), Contact the local council or relevant trade association for information. 4. Decide on a trade name if you are not trading under your own. Check with the Companies Office Register, Trade Marks Register, and Yellow Pages to see what names are already listed as companies, trademarks, and sole traders or partnerships. 5. Open a trading account with your bank. Typically you would use account name like: Your Name Trading as ACME Services.

4 6. Check that you are in compliance with the Fair Trading, Consumer Guarantees, Layby Sales Acts, etc. The Commerce Commission and BiZinfo have a number of useful publications available on this area. 7. Contact an insurance agent or broker about suitable business insurance. Consider liability, property, business continuation insurance, loss of income insurance, etc. 8. ACC insurance for self employed people is compulsory and is automatically billed based on your ir3 tax return details. No registration is necessary. If you have employees, their premiums are automatically billed based on your PAYE returns. Partnership A partnership consists of a number of individuals conduct their business together in order to make a profit. It is often referred to as a firm. The minimum number of individuals is 2 and the max.number allowed is 25. Partners have an equal share in the business, unless stated otherwise in the partnership agreement. Where provision hasn't been made under the partnership agreement, the Partnerships Act 1908 applies. Partnerships must file an annual tax return stating each partner's share of the income and partners are taxed personally on their share. Advantages Easy way to start up a business Low start up costs and cheap to run Business risk, assets, responsibilities and profit is shared No registration required Business continuance is possible if one partner becomes sick or unable to perform their duties in the business Disadvantages Not recognised as a separate legal entity Finding a suitable partner can be difficult Divided authority - therefore requires trust and confidence in each other Partnership ends if partner leaves or dies -remaining partners need new agreement Unlimited liability - jointly liable with other partners for all debts and obligations incurred by each partner File annual tax return for partnership How to set up a partnership 1. Inform Inland Revenue - and check if you need to register for GST. Ask about their Business Tax 2. Information Officers and the free services they offer. 3. Check with your local council that your chosen place of work complies with health and safety regulations, the Resource Management Act, etc. 4. Certain businesses require a permit before they can start trading (eg. cafe, second-hand dealer, butcher). Contact the local council or relevant trade association for information.

5 5. Decide on a trade name if you are not trading under your own. Check with the Companies Office Register, Trade Marks Register, and Yellow Pages to see what names are already listed as companies, trademarks, and sole traders or partnerships. 6. Open a trading account with your bank. Typically you would use account name like: Smith and Jones partnership Trading as ACME Services. 7. It is advisable to have a 'Partnership Agreement' in place, drawn up by a solicitor. it should include the name, description and place of business, the rights and duties of each partner, profit and tax split, contribution from each partner, any limitations of authority, provision for the death of a partner, addition or departure of a partner, dissolutions, etc. 8. Check that you are in compliance with the Fair Trading, Consumer Guarantees, Layby Sales Acts, etc. The Commerce Commission and BiZinfo have a number of useful publications available on this area. 9. Contact an insurance agent or broker about suitable business insurance. Consider liability, property, business continuation insurance, loss of income insurance, etc. 9. ACC insurance for self employed people is compulsory and is automatically billed based on your ir3 tax return details. No registration is necessary. If you have employees, their premiums are automatically billed based on your PAYE returns. Limited Company Limited Company A company is an association of individuals recognised as a separate legal entity and registered under the Companies Act The company is separate from its shareholders and directors, therefore the shareholders have limited liability to the company. Under the Companies Act the directors have certain defined duties, and the company must have at least one share, one shareholder and one director. There must be a physical address for the registered office. Advantages Separate entity for legal and tax purposes Flat tax rate of 28% Financial liability of shareholder is limited to the value of their shareholdings Shareholders personal and business affairs are maintained separately Generally more sources of finance and capital available Perpetual succession Ownership is transferable Disadvantages Most expensive and complex structure to set up and maintain (but invariably cheaper than a TRUST) Constitution restrictions may exist Personal liability in some instances - eg. when trading beyond ability to pay debts Annual return - therefore information on company is open to public inspection Closely regulated - ongoing administrative, regulative and legislative requirements Although a company structure offers some protection from creditors, lenders usually still require personal guarantees to ensure loans are repaid

6 How to set up a limited company 1. Select a good Accountant (or possibly lawyer) 2. Contact the Companies Office to reserve a name for your company (fee charged). The name will not be reserved if it is identical or almost identical to that of an existing company. 3. After the Registrar has confirmed your name, you have 20 working days in which to register the company as per the Companies Act You will receive a Certificate of incorporation. Certain documents are required to support an application - check with the Companies Office. 4. Open a trading account with your bank. Typically you would use account name like: ACME Services Ltd. 5. Inform Inland Revenue - and check if you need to register for GST. Ask about their Business Tax information Officers and the free services they offer. 6. Check with your local council that your chosen place of work complies with health and safety regulations, the Resource Management Act, etc. 7. Certain businesses require a permit before they can start trading (eg. cafe, second-hand dealer, butcher) Contact the local council or relevant trade association for information. 8. Check that you are in compliance with the Fair Trading, Consumer Guarantees, Layby Sales Acts, etc. The Commerce Commission and BiZinfo have a number of useful publications available on this area. 9. Contact an insurance agent or broker about suitable business insurance. Consider liability, property, business continuation insurance, etc. 10. ACC insurance for self employed people is compulsory and is automatically billed based on your ir3 tax return details. No registration is necessary. If you have employees, their premiums are automatically billed based on your PAYE returns. THE BEST LEGAL STRUCTURE FOR RUNNING YOUR BUSINESS The Best legal structure suitable for your Business depends on factors that include size, the degree of protection from creditors, the control flexibility you desire, and the tax treatment you wish to have. Partnership Trust Company Description Exists where two or more people Exists when one or more trustees hold A Legal entity created which has the legal powers Primary governing legislation Partnership Act!908 Trustee Act!956 Companies act!993 Limited Liability - No limited liability for Trustees are prima facie personally liable Shareholders and directors are personally liable in

7 Set-up costs No registration or specific Trust deed and transfer of property - Incorporation required. Ongoing Administration costs - partnership tax return must be filed but the return provides only A trust has its own IRD number - If there is no Trust incomethenafull - Annual company return required. - Certain actions require notification to the companies office and/or Who Has Control Partners unless Trustees, subject to Directors control management. Flexibility Less flexible than other Income Tax Income and losses of partnership are attributed back to the partnership itself is not a tax entity. Tax paid by partners Trustees income taxed at 33% unless distributed to a beneficiary within six months after end of year income. Beneficiaries' income Company taxed at 28% In general, tax losses can not be passed to shareholders. 49% continuity of ownership required for tax losses to be carried The Following is a comparison of legal structures where several participants are involved: In Summary- At one end, a company offers limited liability but is much less flexible and much more costly to establish and maintain. At the other end an unincorporated joint venture is much more flexible and much less costly to establish and maintain, but the participants are exposed to personal liability. In between, partnerships and trading trusts occupy their own niches performing different functions. I hope this document helps you understand a little bit more clearly the different types of business structures.

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